TARP Money may not be so Easy to Return

After passing the stress tests, several US banks made it clear they want to return the TARP funds post haste. However, signals from Fed officials indicate not so fast. Reports cites three institutions, JP Morgan Chase, American Express and Morgan Stanley, which were directed to boost common equity (the former two) or raise more capital (the latter, after it already indicated it would sell shares to cover the shortfall identified by the stress test.

This seems to illustrate two points. First, the stress tests were likely for public consumption and confidence, to be confused with real policy. Second, given potential political fallout, officials need to avoid banks having to re-enter TARP after exiting the program. It cannot be a revolving door, or perceived as such.

Still some banks are expected to be approved to re-pay the TARP money and the Federal Reserve is expected to announce these banks next week. The repayment will be seen as a success, like some of the facilities the Fed has created that are winding down, like its support for commercial paper, money markets, and fx swap lines with foreign central banks. In addition, those funds that are repaid appear to be able to be used to finance the expansion of TARP to include most recently several large life insurers.